The long-awaited change from a proprietary Brazilian format transfer pricing report to an OECD format has been generally sought by companies for years.  Under the current draft legislation, which was announced December 29, 2022, the Brazilian Parliament has 120 days to transpose the draft into law.  The first hurdle is that Brazil has both a new president and a new parliament, but though not certain, it’s still quite likely that they will adopt the draft legislation into law. 

One of the most significant changes is the introduction of the arms length principle into Brazilian transfer pricing reporting. This expands the methods available to taxpayers and incorporates concepts such as the comparability analysis, functional analysis, and benchmarking into Brazil’s transfer pricing compliance, as well as expanding the range of transactions subject to the new rules. Under the current system, the focus has been on tangible goods, services, and rights. If adopted into law, the new regulations will cover any type of financial or commercial transaction as well.  

By incorporating the OECD’s recommended methods into law—along with the comparability analysis, functional analysis, and benchmarking—Brazil would replace its current system of legally stipulated markups and margins. The current system is dependent on the simple accounting logic inherent in the electronic corporate income tax return.  For the 2023 reporting year, taxpayers would have the option to apply either the current transfer pricing rules or the new OECD format reporting. The OECD format would be required for FY 2024. 

Brazil’s draft transfer pricing legislation embraces new methods and new types of transactions—like those involving intangible assets—but conspicuously absent are low-value services, which while previously mentioned are not covered in the draft.  It’s assumed that they will be addressed in future legislation, but that remains to be seen. 

 While there are no real surprises in terms of the new draft law—for years, companies have been adhering to these standards in many other countries—there will be a new level of subjectivity in terms of Brazil’s transfer pricing compliance. Certain transactions, like those involving commodities, which would rely on the comparable uncontrolled price method (CUP) will be more immune than others, but multinational companies would be wise to gauge where issues may arise.  

For instance, if Brazil embraces the profit-split method, there could be a higher risk of double-taxation if complementary adjustments fall short. And there could be tight restrictions—or increased scrutiny—on financial transactions, like intercompany loans and guarantees, as Brazil has always frowned upon hard currency leaving the country.  We may see Brazil add its own requirements above the BEPS platform.  

Like any other paradigm shift, there will be a few bumps along the way, and companies should always consider where they are at risk. Still, assuming it passes, Brazil’s new transfer pricing regime will go a long way in terms of providing consistency on the global transfer pricing front, and most taxpayers will find that a huge advantage. 

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